O2 and Vodafone: ‘We’re building a better network’

‘It’s bigger, bolder, sooner.’ Those were the words Vodafone UK CEO Guy Laurence used to describe the benefits of its network share with O2. The timing of last week’s announcement may have come as a surprise, but many industry observers had expected this kind of collaboration some time ago.

Mobile understands that talks about the joint venture began in earnest late last year. Under the partnership, O2 and Vodafone will pool their basic network infrastructure to create a national grid of around 18,500 sites. This amounts to an increase of more than 40% for either operator. The companies are currently in talks with Ofcom about the plans, and a spokesman for the industry regulator told Mobile it would ‘carefully consider the appropriate way forward’.

If work begins as hoped later this year, the networks will offer indoor 2G and 3G coverage for 98% of the population by 2015, turning on former not-spots. They also hope to deliver a 4G service for the same area, within the same timescale, some two years ahead of the anticipated 2017 regulatory requirement.

East meets west

The operators will effectively split the UK in two, with O2 responsible for the design, management and maintenance of the equipment for the east of the country, and Vodafone taking charge of the west.

Laurence described the task as a ‘colossal undertaking’, but the benefits to both operators are palpable. Most companies are trying to cut costs from their balance sheets and the financial benefits of network sharing are huge. Laurence and O2 UK CEO Ronan Dunne repeatedly rebuffed questions about how much each business would save, but Laurence admitted: ‘We wouldn’t enter this if it didn’t benefit us.’ Ovum senior telecoms strategy analyst Emeka Obiodu said: ‘The beauty of the deal is that both Vodafone and Telefónica can look forward to saving at least 25% of their network costs.’ He claimed that by 2015, both companies could potentially make combined savings of more than £600m.

Obiodu added that the rollout of next generation mobile services would lead to additional cost savings. He said: ‘The CEOs told us that the network sharing deal at the 2G and 3G level, especially with the installation of single RANs, is laying a solid foundation for further sharing on LTE. If we then assume that it could cost up to £1bn for each operator to roll out LTE in the UK, combined potential savings for both Vodafone and Telefónica from this deal would be worth in excess of £1bn by the time they hope to have 98% LTE coverage in 2015.’

However, any customers anticipating that the network share agreement would lead to cheaper deals are likely to be disappointed. Dunne said it was unfair to focus solely on how the deal would impact on price, as if you live in a rural area without coverage, or an area with patchy reception, it would bring significant benefits to consumers.

One thing they won’t be sharing is spectrum. Dunne denied a signal sharing scheme was on the cards following the team-up, while Laurence laughed off suggestions the deal is the first step in a potential marriage of the two telecoms giants, adding: ‘There’s no merger, full stop.’ He also stressed the two companies would continue to compete ‘ferociously’ with one another.

Race for the prize

At this stage, it seems unlikely that the deal will generate the same frenetic rows that have characterised the debate over the forthcoming 4G spectrum auction. If anything, rivals were sanguine about the plans. An Everything Everywhere spokesman said: ‘It’s good to see the other two key players in the UK market being spurred into action following our call to bring 4G to Britain this year. As with any plan of this scale, we would expect Ofcom to carefully review the proposal to ensure long-term fairness and competition across all aspects of the industry.’

Once it is set up, the joint venture will become the second network share in the UK after T-Mobile and Three’s MBNL. However, the O2/Vodafone partnership will be anxious to avoid the early teething problems MBNL suffered when it was first set up in 2008. One senior mobile industry source said the companies should be prepared to take a short-term hit in case there are any service outages. He said: ‘You can’t argue with the economic benefits of a network share but you shouldn’t underestimate the pain of change. However, it is worth it in the long run.’

O2 and Vodafone have teamed up once before through the Cornerstone network share programme, but the pace of change, with surging smartphone sales fuelling data demands, meant that the project needed to be boosted, and fast. Dunne said: ‘People are crying out for more and better coverage and we are going to respond to that. It’s a big, bold, ambitious goal.’ Laurence added: ‘It’s a lot of engineers, a lot of trucks and a lot of work… but there’s a huge prize at the end of it for consumers.’